After financial storm, hurricanes may test insurers

Falling surplus, less access to capital, leaves industry more vulnerable

By

AlistairBarr

SAN FRANCISCO (MarketWatch) -- The financial storm ravaging the insurance industry has left it more vulnerable to real storms that may hit the U.S. during this year's Atlantic hurricane season.

The National Oceanic and Atmospheric Administration's Weather Service Climate Prediction Center said Thursday that there could be as many as three major hurricanes this season, which runs from June through November.

Forecasters at the Center said there's a 70% chance of having nine to 14 named storms, of which four to seven could become hurricanes. One to three of those could become major hurricanes, defined as Category 3, 4 or 5 storms.

Hurricane activity is closely watched by the U.S. property and casualty insurance industry, which paid out more than $26 billion in catastrophe claims last year, according to the Insurance Services Office.

Hurricane Ike hit a 500-mile stretch of coastline in Louisiana and Texas when it came ashore on Sept. 13, triggering insured losses of roughly $11.5 billion. That made it the third most expensive U.S. hurricane, after Katrina in 2005 and Andrew in 1992.

Two days later Lehman Brothers
LEHMQ
collapsed in the largest bankruptcy in U.S. history and insurance giant American International Group
AIG, +0.28%
almost failed during the same week, triggering a financial maelstrom more costly than any hurricane.

As stock and credit markets plunged, insurers' investments cratered, cutting into the money they set aside to pay future claims and underwrite new risks. The policyholder surplus of U.S. property and casualty insurers dropped 11.3% in 2008, according to influential insurance rating agency A.M. Best.

"Primary insurers are seeking more reinsurance to help them pay claims should hurricane losses pick up in 2009," A.M. Best wrote in a report earlier this week.

Insurers usually turn to reinsurance companies to unload some of the risks they can't handle alone. However, this part of the industry has also been weakened by the financial storm.

The capacity of U.S, Bermuda and large international reinsurers to take on more risk, as measured by their shareholders' equity, slumped by roughly 15% last year, A.M. Best data show.

"Insurers and reinsurers will be hoping for a respite in storm activity," A.M. Best said.

Reinsurers also have a place to go to unload some of their risks - the retrocessional market. But even here, the financial crisis has limited the capital available to cover risk and several retrocessional reinsurers have left the market, A.M. Best explained.

When Hurricanes Katrina and Rita hit in 2005, retrocessional reinsurer PXRE Group was hit hard and eventually sold itself to specialty underwriter Argo Group
AGII, -0.68%

But back then, the stock market was climbing and credit markets were booming, giving reinsurers access to lots of new capital to take on more risk. In the wake of the 2005 devastation, many new reinsurers sprouted. See full story.

If big hurricanes hit this year, the capital markets may not be so welcoming.

"Insurers and reinsurers know how unlikely it is that they will be able to quickly raise or 'reload' capital if significant catastrophe losses occur in 2009," A.M. Best warned this week.

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